Navigator

Article

Articles menu

Article content

- The fever of economic crisis seemed to lift somewhat this week, as bullish comments from banking CEOs gave equity indices a big jolt of enthusiasm. With few data releases to get in the way, the DJIA sustained four days of solid gains led by sustained upside in shares of the nation's largest banks. What data there was not necessarily positive, but seemed to be more or less ignored by investors. The February advanced retail sales data turned almost positive (and +0.7% ex autos), although the employment numbers were as horrible ever. The enthusiasm even spread to moribund GM, where CEO Wagner said the company wouldn't need a $2B aid injection to survive the month of March. But the storm clouds remain, with the World Bank predicting the global economy would contract for first time since World War II, the IMF hinting at negative global growth for the year and US weekly jobless claims above 600 thousand for the sixth week in a row. Equity markets had their first positive week in the last seven: for the week the DJIA rose 8.9%, the Nasdaq Composite jumped 10.6%, and the S&P500 soared 10.7%.

- The enthusiasm for stocks was touched off by Citigroup CEO Vikram Pandit, who told the bank's employees in an internal memo on Monday that Citi was profitable in the first two months of 2009. The next day a filing from Citi disclosed that January and February revenues were $19B, confirming Pandit's assertion. On Wednesday afternoon JP Morgan CEO Jamie Dimon reprised Pandit's act, saying that the bank has been solidly profitable in January and February. Then on Thursday afternoon Bank of America's CEO Ken Lewis said BoA was also profitable in January and February. The timing and similarity of the remarks unsurprisingly prompted some short-lived conspiracy theories, but commentators were quick to say that given all the free money being handed out by the Fed, it's not a huge surprise that the banks are profitable.

- A back-and-forth conversation on whether to alter or even suspend mark-to-market accounting went on throughout the week, leading up to Congressional hearings on the subject featuring testimony from both the SEC and FASB on Thursday. Fed Chairman Bernanke said he strongly endorses the principle of mark-to-market accounting while also noting he believes current conditions may distort the practice. FASB Chairman Herz pledged the board will release a proposal on mark-to-market within three weeks, although it remains unclear what sort of changes might be made to the accounting rule. In an indication of the hunger for clarity on this issue, in a CNBC interview on Monday Warren Buffett seemed cautiously optimistic about toxic assets held by banks, which he said have very good potential for rich returns if their current valuation is based on mark to market. "I'd rather buy a bank's toxic assets than their good assets,” he said.

- The New York Fed tweaked compliance and eligibility rules for the TALF this week and extended the final date for initial requests to March 19th. The former change removed small business loans guaranteed by the SBA as eligible collateral. According to S&P, TALF will likely attract hedge funds as new buyers of asset-backed securities (ABS), although the facility may fall short of its stated lending potential of $1.0T due to certain restrictive terms and adverse market conditions. Some investors expressed concerns with the program, particularly about how bad losses could get on new consumer loans. Recall that Meredith Whitney kicked off the week with more dark prognostications about future losses on credit cards.

- Two colossal merger dramas were resolved and another giant tie up was announced this week, sending waves of merger rumors around the market. On Monday Schering-Plough agreed to a $41B reverse merger with Merck at $23.61/shr in cash and stock. The companies plan to combine under the name Merck. Later the same day Dow finalized its $16.5B acquisition of Rohm and Haas at the original price of $78/shr, sweetened with around $3B in new investments in Rohm. On Thursday Roche finally named a price Genentech could agree to after months of wrangling. Roche will pay $95/shr, in a deal valued at $46.9B in total. Recall that the merger offer was first announced back in July, 2008 at $89/shr. Dow's CEO also mentioned that he is trying to revive negotiations over the K-Dow venture with Kuwait. In other M&A news, CV Therapeutics signed a deal to sell itself to Gilead Sciences for $20/shr in cash, for a total deal worth $1.4B, and rejected a lower rival bid from Astellas Pharma.

- General Motors and Ford continued negotiations with the labor unions, to mixed results. On Wednesday Ford reached a wage deal with the UAW in its ongoing attempt to make the business competitive with foreign “transplant automakers.” Ford and the UAW have agreed to suspend COLAs and other performance pay (even overtime), bringing the automaker's average hourly wage rate to $55, which Ford says lets it compete with foreign automakers with operations in the US. It expects to reach parity with foreign US manufacturers, at $48-49/hr, in about two years. Meanwhile, GM's negotiations with the UAW have hit a snag over VEBA healthcare obligations, although Canadian Auto Workers union approved GM's restructuring deal. Late Friday afternoon, a report circulated that the US Government Auto Task Force has hired an in-house bankruptcy lawyer, apparently in preparation for a bankruptcy contingency.

- Gold futures continued to consolidate this week holding the $880/oz support level after reaching $1000 last month. Dealers were encouraged by healthy demand from hedge funds for gold as it traded lower, commenting that hedge funds are positioning themselves to profit from central bank action on the one hand or deepening economic turmoil on the other. If various economic rescue packages gain traction and a recovery begins to emerge, inflation will likely become a catalyst. On the other hand, if recession trumps central bank efforts and things continue deteriorating, flight to safety bids will bolster gold.

- Energy futures went on a wild ride this week, but ended little changed. Comments from OPEC ministers were plentiful ahead of their meeting in Vienna this Sunday, with the bulk of them apparently leaning toward an additional cut as inventories are still seen as too high. On Monday Saudi Arabia, OPEC's most influential member, said that the cartel should focus on improving compliance on prior cuts from the roughly 80% level OPEC has achieved rather than announcing a new cut.

- Coming into the week, US Treasury markets remained squarely focused on supply concerns. Tuesday's sharp bounce in stock prices only enhanced bond sellers' conviction, pushing the benchmark yield towards its highest levels of the year above 3%. Some $63B in supply was auctioned off over the middle part of the week and in general prices rallied following the results announcement of each day's auction. Though the bid-to-cover ratios were nothing to get too excited about, both the 10 and 30 year reopening saw a rise in the percentage awarded to indirect bidders, providing some assurance foreign demand remains robust. Treasury prices have even shaken off a statement from Chinese PM Wen who indicated he was worried about his countries holdings US government debt. The long bond finished the week with a yield below the level where the 30-year reopening went off while the benchmark has drifted back towards 2.85%.

- US fixed income traders also kept a close eye on European and in particular UK government bond markets this week. On Wednesday, the Bank of England (BOE) formally began its quantitative easing campaign with £2B in purchases of 2014 to 2018 Gilts. The reverse auction went exceedingly well with a bid-to-cover ratio of 5.25 and the BOE received over £10B in offers. Subsequently the 10-year Gilt saw its yield move to an all-time low of 2.936% and below that of the 10-year Bund for the first time in more than 7 years. The BOE is set to buy another £5B in long term Gilts next week and a similar positive reaction will only add to speculation the Fed is getting ready to buy Treasuries itself. Next week's FOMC meeting and Chairman Bernanke's appearance of 60 Minutes this Sunday provide a perfect opportunity for more clarity on this matter.

- The major story in the corporate bond market remains the availability of credit for high grade companies. S&P's much anticipated downgrade of General Electric from AAA occurred and even a Fitch downgrade of Warren Buffets Berkshire Hathaway had little overall effect. Aerospace leader Boeing and oil service behemoth Halliburton each successfully raised close to $2B in medium to long term debt while food distributor Sysco came to market for $500M. Major US financial institutions continue to fight the good fight to clean up their balance sheets as evidenced by FDIC backed auctions from Goldman Sachs, Morgan Stanley and Banc of America. Regional Banks regained the spotlight when Moody's said it was reviewing the ratings of some 23 regional banks for possible downgrades.

- Central bank action dominated currency markets this week, with the Swiss National Bank's big move on Thursday morning comprising the main event. The Swiss surprised traders with a major currency intervention that accompanied a scheduled rate decision (the bank cut the three-month target rate by 25 bps to 0.25%), the first move of its kind by a major central bank since the Bank of Japan intervened in the yen five years ago. The SNB said it would purchase foreign currencies and bonds to stem the appreciation of the Swiss Franc and dampen risks from the global economic crisis. EUR/CHF immediately surged from 1.4850 to briefly test the 1.5300 level twenty-two minutes later, for the cross's biggest intra-day move since the launch of the euro in 1999. Dealers watched as the bank made an historic effort to buy the cross on dealing platforms, in a move that was later officially confirmed by a bank spokesperson. Dealers estimate that at least CHF3B was moved during the operation, noting that the move was most likely an effort to support Eastern European carry-related plays and calm banking sector concerns. Some traders speculated whether the move was EU-sanctioned or not, looking for evidence that some sort of official leadership is emerging to address the core problems driving the economic crisis. Many players also pointed out that the BoJ should pay close attention to the SNB's actions, given that both central banks have expressed a desire to see their currencies weaken.

- Central and Eastern European currencies firmed up in the aftermath of the Swiss action, with PLN, CZK, HUF and TRY all rebounding from weekly lows against the euro. Earlier in the week dealers had discussed the possibility of intervention by the Hungarian Central Bank after the bank said last weekend that it would start converting euro-denominated EU funds on open market and insisted that it was "ready to use all monetary tools." With euro sales, Hungary follows in the footsteps of Poland, which has also sold euros from the EU to shore up its currency. Other central bank action in Eastern Europe added to the risk environment. Ukraine reportedly warned numerous banks against selling Hryvnia below the official bank rate. In Russia, Central Bank Governor Ignatiev said the ruble has stabilized in recent weeks with a tendency toward strength. He reiterated that the bank would do "whatever is necessary" to maintain the RUB41 ceiling in the basket.

- Earlier in the week risk aversion seemed poised to regain its composure thanks to the truly dismal Chinese trade data, which showed exports plunged by a record amount. But comments from Moody's that Russia was “not yet on brink” of a ratings cut helped to offset the initial impact of the Chinese trade numbers. The comments from Citigroup's Pandit also helped, while China's PBoC commented that companies are less worried about economic weakness in Q2 and that business sentiment is recovering. Non-USD carry-related pairs also dominated trading late in the week. Yen repatriation ahead of the end of the Japanese fiscal year prompted some volatile price movements as exporters repatriated profits. Note that traders will be closely watching the G20 finance minister meeting in the UK this weekend, which is taking place ahead of the formal summit on April 2nd in London. Ministers will likely discuss the need to avoid protectionism.